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Sequencing of reforms, financial globalization, and macroeconomic vulnerability

In: Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR

  • Sebastian Edwards

I use a large cross country data set and panel probit analysis to investigate the way in which the interaction between trade and financial openness affect the probability of external crises. This analysis is related to debate on the adequate sequencing of reform. I also investigate the role played by current account and fiscal imbalances, contagion, international reserves holdings, and the exchange rate regime as possible determinants of external crises. The results indicate that relaxing capital controls increases the likelihood of a country experiencing a sudden stop. Moreover, the results suggest that "financial liberalization first" strategies increase the degree of vulnerability to external crises. This is particularly the case if this strategy is pursued with pegged exchange rates and if it results in large current account imbalances.

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This chapter was published in:
  • Takeo Hoshi & Takatoshi Ito, 2009. "Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR," NBER Books, National Bureau of Economic Research, Inc, number hosh07-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12017.
    Handle: RePEc:nbr:nberch:12017
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government.
    2. Edwards, Sebastian, 2007. "Capital controls, capital flow contractions, and macroeconomic vulnerability," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 814-840, September.
    3. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications 4367, Inter-American Development Bank, Research Department.
    4. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    5. Dani Rodrik, 2006. "Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank's Economic Growth in the 1990s: Learning from a Decade of Reform," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 973-987, December.
    6. Funke, Norbert, 1993. "Timing and sequencing of reforms: Competing views," Kiel Working Papers 552, Kiel Institute for the World Economy.
    7. Reuven Glick & Michael M. Hutchison, 2001. "Capital controls and exchange rate stability in developing countries," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul20.
    8. Hali J. Edison & Francis E. Warnock, 2001. "A simple measure of the intensity of capital controls," International Finance Discussion Papers 708, Board of Governors of the Federal Reserve System (U.S.).
    9. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness," NBER Working Papers 10496, National Bureau of Economic Research, Inc.
    10. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, vol. 108(447), pages 383-98, March.
    11. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella.
    12. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
    13. Gian Maria Milesi-Ferrett & Assaf Razin, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Working Papers 6620, National Bureau of Economic Research, Inc.
    14. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, vol. 94(2), pages 59-64, May.
    15. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
    16. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    17. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
    18. Sebastian Edwards, 2007. "Crises and Growth: A Latin American Perspective," NBER Working Papers 13019, National Bureau of Economic Research, Inc.
    19. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
    20. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September.
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